Liquidity
Liquidity varies dramatically across pooled investment types. Understanding how each vehicle provides (or restricts) access to your money is essential for suitability.
Open-End Funds (Mutual Funds)
- Redeemable on demand - fund must buy back shares at NAV
- Must fulfill redemption requests within 7 calendar days
- Forward pricing: all orders priced at the next calculated NAV (computed once daily after 4:00 PM ET)
- Cannot be purchased on margin or sold short
Closed-End Funds
- Trade on exchanges (NYSE, Nasdaq) like stocks - continuous intraday pricing
- No redemption right with the fund; must sell on secondary market
- Can be purchased on margin and sold short
- Liquidity depends on trading volume
ETFs
- Trade on exchanges throughout the day like stocks
- Creation/redemption mechanism via authorized participants (APs) keeps price near NAV
- Can be purchased on margin, sold short, and traded with limit/stop orders
- Generally highly liquid (except niche or thinly traded ETFs)
Unit Investment Trusts (UITs)
- Redeemable with the trust (like open-end funds)
- Less liquid than mutual funds; some UITs have limited secondary markets
Private Funds (Hedge Funds, PE, VC)
- Highly illiquid - subject to lock-up periods (often 1-2 years)
- Redemption restrictions (quarterly or annual windows with advance notice)
- Not traded on any exchange
Exam Tip: Gotchas
- "Lock-up period" signals a private fund, not a mutual fund. Mutual funds must redeem within 7 days by law; hedge/PE/VC funds can restrict redemptions for a year or more. If a question mentions lock-ups, gates, or quarterly redemption windows, the answer is a private fund.
Non-Traded REITs
- Extremely illiquid - no public exchange for trading
- Redemption programs limited and may be suspended
- Often require holding periods of 5-7+ years
Liquidity Comparison
| Vehicle | Liquidity | Pricing | Margin/Short |
|---|---|---|---|
| Open-end fund | High (7-day redemption) | Once daily (forward) | No |
| Closed-end fund | Exchange-traded | Continuous (market) | Yes |
| ETF | Exchange-traded | Continuous (market) | Yes |
| UIT | Redeemable with trust | Varies | No |
| Hedge fund | Low (lock-up periods) | Periodic (quarterly) | N/A |
| Non-traded REIT | Very low | Periodic appraisal | No |
Exam Tip: Gotchas
Open-end mutual funds use forward pricing - an investor placing an order at 2:00 PM receives that day's 4:00 PM NAV. An order placed at 4:01 PM receives the next business day's NAV. The exam frequently tests this timing rule.